If you’re an entrepreneur or small business owner, then you’ve probably become concerned with your inventory cost of ownership. Managing and mitigating these costs will improve your bottom line and cash flow. To address this you’ve decided to purchase an inventory control software package, but are unsure of what to look for or what that inventory software should look like. Choosing the right inventory software isn’t easy and there are a myriad of options to choose from. If you find yourself in this situation, don’t despair.
The key to choosing the right inventory tracking system lies in understanding what your company needs, how you manage your inventory and how that software will help improve your visibility on your costs of inventory. So, what are the main considerations?
1. System Must Be Live
First and foremost, any inventory control system must be a live entity that tracks all costs from the day inventory is purchased, received, used in manufacturing or sold by the company. The inventory control software must allow the company’s employees to decipher time sensitive & critical information. When a part or raw material is removed from inventory, the system must record that transaction and captured cost immediately. An example of a system that isn’t live is an excel spreadsheet. A number of companies use excel spreadsheets to manage their inventory, but the information contained within that excel sheet is only updated when someone physically takes the time to enter extensive, time consuming and often erroneous data. On the other hand, a live inventory software system is one where costs are tracked as they occur, from multiple sources throughout the company and one that automatically tracks the effects of time on gross profit.
2. Provide Proper Tools for Inventory Costing
There are a number of different inventory costing methods. Which one does your company use? Is it FIFO (First In First Out), LIFO (Last In First Out), standard/fixed cost or an average weighted cost of inventory? How you manage your inventory determines how your company calculates gross profit per product line and your company’s inventory returns. FIFO states that those parts and raw materials that were first purchased are first in line to be used or sold. This ensures that inventory purchased last month is moved out before those parts purchased this month. LIFO states that the last items purchased are the first to be sold. Standard cost allows companies to fix costs on parts and materials.
Most companies today use FIFO and weighted average cost as both LIFO and standard cost are seen as outdated and antiquated. In fact, LIFO is actually banned in the UK because it allows companies to lower their income statements, thereby lowering taxes. – Your company most likely uses FIFO or weighted average cost – therefore, be sure that the inventory control software properly addresses your company’s inventory costing methods and approaches.
The above video explains the two main costs of supply chain management: Holding costs and lost sales. You can read more by going here.
3. Track Holding Costs of Inventory
In order for an inventory control software to show all the costs of managing, using and selling inventory, it must track the holding costs on parts and materials over time. Inventory is a constant reminder of the cost of money. Very few companies support their inventory on their own. Most use loans and business credit lines to finance the purchase of their parts and materials. These loans have a yearly interest rate that can apply to a daily cost.
Everyday inventory isn’t sold is a direct cost of money. However, there are other holding costs. Damaged, obsolete and outdated inventory also play a role, as does warehousing and electricity. The right inventory tracking software will track these costs over time and provide users with insight into total costs of ownership.
The best way to track your inventory holding costs is to itemize your expenditures over a period of time. You can itemize your costs like the table above by going to: Sample Excel Sheet Calculating Inventory Holding Costs. You can use the excel sheet to define your own costs.
4. Track the Impact of Inventory Turnover Rates
As a follow up to the third point, the best inventory software programs allow companies to see the net effect of increasing their inventory turnover rates. Inventory turnover rates simply measure the time it takes a company to purchase raw materials or parts and use them or sell them. Having a high inventory turnover rate means those parts and materials your company buys are used right away. Some companies have inventory turnover rates that can be measured in hours, days or weeks. They manage to turnover their inventory that quickly.
Other companies have longer inventory turnover rates – partly because of the industry they service, their customers' order patterns or their lack of strength in sales & marketing. However, when companies improve their inventory turnover rates they are able to reduce the aforementioned daily cost of money – they don’t hold onto it for too long and therefore are able to reduce those holding costs. Tracking the results of these initiatives is essential.
5. Software Must Track all Costs of Freight
While we discussed the importance of tracking inventory holding costs, as well as the costs of obsolete and outdated inventory, there is still the importance of properly tracking the per-unit cost of freight on incoming and outgoing shipments. The per-unit cost of freight is the cost to bring those parts and raw materials into the company. Mitigating these costs saves money.
It’s perhaps for this reason that a number of companies pursue vendor consolidating practices that increase purchasing power and lower freight by shipping from fewer vendor locations. Efforts to reduce freight costs must be tracked by the inventory control software, allowing individuals to pursue additional cost cutting approaches.
While it's essential that your software track freight costs, it simply won't be able to help you measure the costs of holding inventory versus the savings of purchasing larger volumes. To learn more about measuring holding costs against larger purchases, go to: Inventory Carrying Costs Versus Higher Volume Purchases
When choosing an inventory control software package, make sure to match that software to your company’s essential needs – regardless of how small they may appear to be. Be sure to call upon your employees to partake in the process. As an entrepreneur and small business owner, you may not be privy to the day to day situations your employees manage or struggle with. Their input is invaluable in ensuring you make the right choice.
Comments